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Share repurchases vs dividends

In Lintner’s model (1956), companies have ‘a managed dividend policy’ (i.e. they seek for a target dividend). Share repurchases are virtually absent in Lintner’s study (1956) and in Miller and Modigliani’s (1961). Indeed, these operations were quite rare at that time.

The recent French statistics emphasize that in 2008, companies listed on the CAC 40 stock market index have repurchased (in net value) €11.2 million worth of shares (i.e. 1% of their average market value in 2008)¹⁷. How is it possible to explain this phenomenon? A possible argument might be found in the relationship between share repurchases and dividends and, in particular, in the fact that dividends and share repurchases may be either complementary or substitutable. To analyze this relationship, we will present studies focused on the “tax effect”, the “clientele effect”, informational asymmetry and the use of free cash-flow (FCF).

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